Marcelo Astrachan (Darwin Capital): You should define what are your business objectives, what are you looking for, what are your interests, and based on that you restrict what you should read

By Roman Bdaitsiiev

28 Sep, 2020

Marcelo Astrachan is Senior Partner & Founder at Darwin Capital
Marcelo Astrachan is Senior Partner & Founder at Darwin Capital

Financial intelligence combined with a deep knowledge of business operations: Darwin Capital brings together the best of both worlds to bring new air and innovate the capital market. With a long experience in leading international ventures and projects, the founding partners bring to each case an understanding that only hands-on executives can have about conducting business.

These resources are placed at the service of our customers through a complete advisory service. From companies looking for financial support to acquisition projects, Darwin Capital is ready to treat every new project as unique, attentive to its specificities. The final objective, however, is one: to do everything so that our customers multiply their value, properly prepared for mergers and acquisitions.

How it all started? How did you decide to enter the venture investment business?

First of all, I’d like to thank you for the invitation. It is an honor to participate in your project. I hope your audience will like what you have to present from Brazil, Rio de Janeiro city. I would try to tell you a little bit about my background just to understand the perspective and how I arrived in this situation that I’m right now.

I have graduated an engineering and later became a partner in a company named Accenture. This is a global consulting company. And as far as I am aware of it, they also operate in Ukraine and all of the Eastern European countries.

I had a lot of responsibility and when we launched our IPO some years ago it was very successful. And that was my first move in the arena of big operations. After that, I worked as the president of a big technology company in Brazil. Then I decided to buy Cyberlinks, a technology company in Brazil that has a revenue of $2 million at that time. Throughout four years of my period in there we raise our revenue to $10 million and three international companies have demonstrated interest in our company and we decided to sell it to a buyer from Chile. After two years we sold our company for approximately $70 million. If you take a look, it was a period of six years and an evolution from $2 million of the original price that I have paid when I bought the company to $70 million. It was a very successful case here. I received a lot of help from many people, including my oldest son, who was making an MBA in the US, my lawyers, partners, and investors.

The Genesis of Darwin Capital, which is my company now, was set in that period. I decided to prepare myself to help other companies to be successful. And to summarize it we have four areas of operations: mergers and acquisitions, and my vertigo of startups.

What industries are you interested in?

That is the century question for the millennial answer. I’m going to explain our approach because this is not something specific for Brazil, it’s a worldwide perspective. There are a lot of good people working in the area of stock investment, high qualified people. We have to define a strategy where we could be at least successful and we decided to make something different. When I mentioned differently I’m not talking about being the best or better, but rather that we have a different approach to be successful in our objectives.

The difference is the following. You probably have already heard about this strategy of spray and pray. Spray means that you invest in a lot of companies and literally pray before a very outstanding guy and the company that you have invested in has announced a very good result. We decided not to move in this direction. Why? Because we recognize that we are very good in some areas and not very good at others. We decided not only to invest but also to go forward with that startup company, to understand their business and to support them.

We do not interfere in their management because the assumption is that we recognize the entrepreneur and their capabilities to manage the company, but I and my partner, we both have a hand on experience and we help them with management, networking, and discuss the basic decisions.

Our portfolio right now has seven companies and for our joy, two of them already are unicorns, of course not in dollars but Brazilian currency, that is anyway a very impressive achievement. They already have enterprise value over R$1 billion that is approximately $200 million. We don’t have a specific thesis in terms of industry vertical or a specific segment. We have three types of criteria that are used to define if we will go forward or not in evaluating and potentially invest in the company.

Can you name industries you really like, yet will never invest into?

I don’t like to be very categoric in saying that we will not invest in a specific space because we are looking to different variables: market, differentiation of what has been presented, and team. I will explain that later. What I can tell you right now, I will not invest in B2C and the reason for that is they normally require a lot of investment and burn cash to be sustainable all the time. There are a lot of companies trying to do that and failing because they don’t have «oxygen». They don’t have enough resources to move forward. Sometimes there are a lot of good ideas that could be very well executed but they are not because they actually don’t have enough money at the end.

Our focus now is B2B. To be transparent, this is not the mantra. We also start to invest in some B2C companies, but later we have pivoted the business objectives and redirected them to the B2B model. This approach was very successful.

What geography of companies are you interested in?

That is something that I actually would like to discuss because, in theory, I don’t have any geographic restriction. It’s a question of focus and capacity to execute. We have links with Portugal and connections with South America. My business, as I mentioned at the beginning, have M&A activity and startups with a synergy between them. Because of the companies that I sell, the founders and shareholders with a lot of money like to invest in my startups. In other way our startups can provide services to some of my clients.

Because of that, we have discussed moving to Portugal because some of our startups have platforms that could be applied there without any restriction, including language. Also, there are some movements towards Mexico, Argentina, and Chile. But at this moment I don’t have any operations outside of Brazil. What we have very concrete now is one of our startups is structuring a plan to start operations in Portugal, perhaps in the last quarter of this year. It’s not yet defined. We are just evaluating at this moment.

We have some investors from outside. A month ago, we have closed a partnership with a venture fund named iArgento, which coincidentally has a business model quite similar to us. I was impressed when realized that. Their portfolio is also not so big, just six companies compare with our seven. You probably know that Israel is a startup nation. If you had been there you might see that the level of technology and market in their companies is much higher than anywhere in the world, except Silicon Valley. Probably we would never have a startup in our portfolio with the level of technology that they can bring to us. Based on that we have closed this partnership and now we are working together and actually, we are very happy. We are raising money to them and they are also operating in Brazil and have already commissioned commercial operations here.

What was the most unusual startup you ever supported?

Unusual? I’m not sure if it was unusual but it was very impactful. We had a startup that we have tried to help. What is the most common name in Ukraine? In Brazil there is a common name Jose. There was a startup called Call Jose. Its objective was to provide basic home services for everyone: to repair electricity, do plumbing work, renovate a home, or do everything that is needed to be done in your home. This startup was very well structured and developed by a very nice team. Everything was nice, but the market was not ready at that time.

They were very creative and generated a lot of different approaches to make their application popular. But unfortunately, it was not successful.

Could you share the most unusual startup pitch you’ve ever seen?

At this moment everybody is very well connected in any country and in Brazil. Everybody knows how to present a pitch. Everyone knows that you have to define the purpose and the business problem that is addressing. I remember a very nice startup that made presented in an unusual manner – didn’t have any presentation at all. There was just a guy, making a very creative pitch with a very good approach. At this moment I have approximately a database of 85 investors who would like to work with Darwin capital. Approximately 30 of them have already invested in our startup companies. I had a group of them with me and everybody was interested not only because the guy was very good, but he also can explain what was the purpose of his startup. It was something related to education and all of us has decided to make the next movement without any materials.

At what stage of the company’s development are you investing?

I would try to explain the value chain of a startup model and then I will tell you where exactly we are entering. At the very beginning, after you have described the idea, it’s time to build a MVP. Normally we are not interested in this stage. There are accelerator companies that will support these early-stage startups to make their first movement. We enter at pre-seed, where the product is already done, the business model has been already tested and normally they are already operational. There is no requirement to have a relevant revenue at this moment, but they have a working product and business model. This is very important for us. In this case, we could invest around $200,000-300,000 and up to $500,000.

Normally you have to think about the whole model, because after that stage, assuming that this startup has traction, good operation and they are evolving, the next step will be the venture funds, who will be putting money into our companies, in a higher amount, from $800,000-1,000,000 up to $1.5 million. You need to be very well balanced in terms of your cap table, the active equity structure of each company. The venture funds in Brazil and the whole world, in order to invest require that the founders must have 60-80% of the equity, they don’t like when the founders are too diluted.

What are the requirements for startups as an investor?

Our first criteria is the market. We use English expression «endless market». In reality, there is no endless market. Any business and any market have a limit. But this is a concept which tells us that the market that for the products that are presented to us is so big that the growth curve is a direct correlation to the execution capacity of these teams and no matter if other competitors could exist. This means that we need to have a market like a blue ocean.

We have a story in Brazil. Two men without shoes were walking in the forest when they. realize the presence of it a tiger. One of them was very scared and told that they are in deadly trouble. But another person answers, that since tiger skin is very expensive they have an opportunity to earn money. What does that teach us? I don’t enter a niche market or an immature one. And the reason is not that they are bad, but rather we cannot contribute to this one in the way that we have in an endless «blue ocean» market.

The second one is that a product and a company has a unique differentiation which allows us to create a narrative that will be attractive both for investors and for the market that they are addressing. This is very important.

And the third one is the team, its qualification, experience, and the most important – flexibility. Because the business, as I mentioned before, can change and you can make a structural change in what you were originally thinking or planning. When you have a team that is stuck, rigid, and can’t think out of the box of what they have created, that will be a problem and we try to avoid it.

What percentage of ownership of a company is fair to take for investment?

As I already mentioned, once we enter a pre-seed stage, we will have equity that can vary from 8% to 15%, which would depend on the business plan, what they have already achieved before coming to us, and the perspectives for the venture funds. We require that the founders should have a minimum 60% of their startup equity.

What multiplication of your investment do you expect on exit?

That’s a very difficult question to answer. Some people in the startup world think they are going to invest and in 2-4 years after they would be millionaires and will have a lot of money. They must understand that most of their projects will not achieve their original expectations. Execution is the key.

One of my successful startups, a Brazilian unicorn named ZOOP, is a financial platform for digital payments. When I joined the company there were $200,000 of original investments together with other two venture funds: Darwin Capital, Ball Conventions, and Avalanche Capital. Together $500,000 for a valuation cap of $9 million and they start traction. In the beginning, it was not so good, but a few years ago in April 2018, they processed around $1-2 million a month GMV transaction volume.

We have food delivery services in Brazil. You could order a meal from a restaurant and they will deliver it to your home. There is a big competitor to Uber Eats in South America called is iFood and it is a very successful company. They decided to invest in our company in April 2018 because they were struggling to have their own payments platform instead of depending on third-parties’ solutions. Right after that, there was an avalanche of transactions to us and in June of 2019 we were already processing $100 million a month and iFood has transferred to us approximately $15 million and they keep going. They cross the year processing $200 million a month. At the beginning of the year with the pandemic, we raised the processing to around $300 million a month that is R$1.5 billion. That’s a lot of money. The valuation now is $250 million and if you compare with the $9 million of initial investment we would have almost 30 times multiplication. And now we are expecting to exit next April.

Another our startup is focused on helping people that require to take medicine on a weekly or a monthly basis. They need privacy and service. We have invested in this startup and this a big success. They have addressed the drugstore market, which was not well serviced in Brazil and is stable. People who need a specific medicine every month or week could receive it inside the box with the right privacy. From the beginning of the pandemic to now we have experienced a 400% growth in terms of projections volume.

So, if you ask me if I was planning that, no, I was not. I believe that we have the marriage between finding a business that has a lot of opportunities in our country and a very well qualified team. Now we are one of them, the most important players in this arena in Brazil.

What do you want to see in the company’s product?

Let me try to explain our approach. I split the stock into three different categories. The first are those that have nothing relevant. They make something in the application, try to better serve something, but there is nothing special on them. The second category improves process which exists already and is operating in a specific way. And the third category is the startup that disrupts something that has been doing in a specific market. In our perspective, I don’t look at the first category, but for the second and third and my preference is to work with a third one because instead of going to a very populated market with a lot of options without any differentiation, present something that you can perceive.

We have 99Taxis, a startup that was created in Brazil. One of their founders was struggling to pick a taxi on a rainy day. After that, he decided to make something different and he created his 99Taxis. He was using the taxis that already exist in the market and has done a very good job. They are a unicorn now and the disrupted the market. What if I have said you 15 years ago that I am creating a startup and you will be able to take a car with someone that you don’t know and without any identification, it will take you from point A to point B. You would call me a crazy guy because this is very dangerous. And now we have Uber that has disrupted their market. And that is what we are looking at when pursuing our startups. We are going to look deeper, but it’s the second part of our analysis.

Investors prefer to work with teams. But have you ever supported a one-person startup?

I have recently experience with a startup, a very nice ecosystem of investors, a lot of money. That was a one-person startup and the founder mad everything. That is wonderful. He is the top one, et cetera. When I have a conversation with him I heard something that I didn’t like. The moment that I decided to give a no go was when I asked to tell me about his team. He told me that there is no team and he is the one that has grade everything and is doing everything. I ask it again. But what about the other team members that were mentioned. They all have options, but he has the whole control.

I don’t believe in a one-man show. I don’t believe in a one-man successful startup. An outstanding team means that you have more than one person. We need efforts, people that are focused on the same objective, and one person alone will not have the best ideas. He will be like a boss. That’s why we do not enter in a one-man startup. I’m not telling that this is not possible to be successful, but we prefer to not try.

What is your due diligence procedure and how long does it take you to cover the whole way from the first meeting with founders to contract and check to sign?

As you can imagine we receive a lot of demands from all of the places. We are already well known because of our results. Some people always looking at us to ask for help and investment. Normally we have an initial step where we apply our methodology with something very simple. I have explained our criteria: B2C, B2B, three criteria of market unicity, etc. To apply them we exclude out of 10 companies that arrived at us probably 7-8. Just 20-30% will pass to the next step. Then we will be talking in more detail with the founders. We analyze the market and understand the problem that is supposed to be solved. We want to make them more agitated.

The first step normally could take two weeks because we don’t want it to be a big venture company with a lot of people doing a lot of things. We are very well-focused on business, negotiation, and selling our services.

So out of these three companies that pass to the second step, perhaps one or two will pass the second step and we will be going in much more detail. We’re going to talk to their clients and the remaining team even if they are not partners and we like to talk with investors if they have some time. Also, we need to talk with some of our peers to understand their perception of that market. So, our due diligence could take from one to two months.

The first fund that we apply is pre-seed. We pay all money with a single transaction. Normally this is a fund for 12-18 months of the company operation and we do not split it into many payments because startups need cash all the time. What about the next step? When raising a series B and startup will need a lot of money we will participate in this series together with two funds.

How many projects do you consider per year?

I think that we consider 200-300 projects per year. This is the number of projects that reach us in many ways. They may use WhatsApp, online application on our website, etc.. There are a lot of ways; they could be referred by our friends or people that know me. We receive opportunities all the time, but we going to work probably with 20 of them. No more than this. In 2018 we have signed with three companies, but usually, it all ends up with one or two investments per year.

How startup teams usually find you? Do you wait for inflow or scout for interesting ideas and perspective teams?

It’s a mix of all of the different channels. At the beginning it was different, but right now we are well known. There are a lot of things that come from LinkedIn. Many opportunities come on WhatsApp because I am a member of different groups there. Brazil has the second user basis of WhatsApp worldwide and users per capita is the first one. We have a lot of WhatsApp groups. I am probably subscribed to more than 400 of them: work, family, and many others. A lot of them are dedicated to startup and venture investment. Since we are well-known, they send us startup presentations regularly. For example, today I have a meeting with one of the startups that has reached us through one of these WhatsApp groups.

What are your red flags?

I would tell you the following, which is not just related to startups but to any business that you have been involved in your professional and personal life. Ethics! Be correct. Be respectful. Be proactive in reporting the situation in your company, even if the news is not good.

There are a lot of people who are very likely want to invest in liquidity around the world. But most of them don’t understand the day to day business of a startup because they come from a traditional business where they were very successful. Be respectful in reporting what is going on in your company promptly. It’s very important. Ethics should be something that you don’t worry about, it’s something that is already in place. I start from the premise that you are ethical and you should keep practice that. Once I have a situation with one of my clients that I have decided to quit because I realized in the middle of my contract with them that they were not correct in operating the business. But the worse thing was they didn’t recognize that this was something that they should not be doing. We were insisting and explaining that. In this regard, there was a clause in my contract that I can quit at any time without anything. Even if I have put the money, I can return my equities to them for one cent as a giveback. I quit the operation and that’s it. The reason was I realized that the founder is not performing well. After he presented the company we put it to work and he has difficulties with presenting materials and the execution was not good. Sometimes this could happen and in our case, this happened once.

Have you ever rejected a startup and then regret it?

Yes, obviously. And it happened not because I have given the no go but because there was not a mutual understanding of an agreement. After that, I confirmed that I was right and I should have been more aggressive to have that company. This company is helping me now because they have received an investment from another fund. Since we become friends they are helping me by introducing my company to this fund. In this business that we are you cannot say that you were rejected and another investor was successful. It’s a cooperation model, you’re going to be working together now, or in the future. There is room for everybody to be successful.

What conferences do you find really useful?

Now everything changed dramatically. Let’s talk about the conceptual way of thinking. It’s important to be known and to learn what is going on in the world, in the market, and in the segment that you are involved. On the other hand, you must define what are your objectives before participating in those seminars, international events, or conferences. Sometimes you could pass the whole year participating in those events and nothing will be generated in business from them.

I participate in them in two different ways. First is what I can grab and develop by participating. Am I going to learn something new, do some networking or could I support any of my company for venture funds or introduce it to the public and that is important? On the other hand, is what I name a leadership. If I am an expert in cybersecurity, online retail, or fintech, I would participate in business-oriented events where I will present my thoughts, beliefs and my way of doing things and people will recognize me as an expert. It is also important. But they are not a good place for finding opportunities and you will only waste money and time.

If you would ask me what are my favorites I could give you a list of different ones with hundreds of them around the world, but there are three of them that I like and are worth visiting and will give good feedback for them.

One is the Web Summit that is now based in Lisbon, Portugal. The last one was in November 2019. The next two are in Silicon Valley, California, USA. One is organized by Harvard and is related to Brazil. The other one is related to Singularity University. I have just mentioned those, but there is probably a variety of them and you must select those that suit you.

Has your VC approach changed after the COVID-19 started?

I would say that our investment approach did not change but rather have been reinforced and I will try to explain it. Let’s have a look at what has happened. I believe the situation is the same worldwide and is not specific to Brazil only. A lot of retail companies have struggled a lot because more than 75% of them in Rio de Janeiro didn’t have a digital channel at the beginning of the year. They could not sell anything because the organic flow of people that exists before the pandemic simply disappears. Now they don’t have those people in front of their stores looking for the articles. Those companies that have prepared for a new world before the pandemic were successful.

Let me give you a fantastic example that is well known around the world. Amazon. At the end of the last century and the beginning of the century, everybody criticizes them. Sears and Marcy, traditional retailers at that time, believe that it does make sense to have big real estate entities and people will come to the consumption place to buy what they want. Amazon has changed the model when and now those who wanted to sell will come to consumers. And now those who have been prepared for the future are successful. I believe that in our perspective we were already involved in this arena without even knowing that. I believe that all investors will redirect their models now to companies that have foreseen the new world. And this is not the world after pandemic but a digital world that was already in place years before now.

So, is COVID a threat or opportunity for VC?

This is something that we have been talking about throughout the pandemic. We cannot change the past. If we start looking back at our past wondering what could be done, we were doing so well and now everything is so bad it will give nothing. We need to understand the future and what we can do better now to improve our situation in the future.

I believe that the pandemic will stop in a moment. Nobody knows when but I hope that soon we’ll have the vaccine and then we will be protected. I don’t believe that the world will come back to the situation before the pandemic. I don’t know about other countries, but I can tell you about Brazil. What is going on in the real estate world of big companies? I was reading an article about New York. The Time Life group of buildings that can have more than 8,000 people working at the same time have just 300 workers now because everybody is working from home.

My business has improved during these times and now I am more productive. I have a lot of different meetings that was impossible before the COVID-19. That is a new reality.

What are the most common areas of weakness in startups?

Weakness sometimes already exists or is created during the process. We like to interact with founders and entrepreneurs. Usually, they are not very optimistic about what they’re going to do. They are more realistic and pragmatic. They understand that things would be not easy. I would like to see a business plan that was accomplished exactly as it was originally developed. Sometimes you have outstanding results, but the weakness is when you try to be more optimistic than you should be.

The other weakness is when you do not understand the cash flow that is needed for operations to achieve the next step to receive more money. What happened in such a case? A lot of companies die because they don’t have enough cash.

Sometimes you can identify a weakness that comes from the society when founders don’t have an alignment, they are not focused, they have a difference which comes up relevant to their operation. And this does not happen just with startups. This is also relevant for traditional companies. They have basically the same principles. For example, you need to look at two basic fundamentals: cost and cash. There were a lot of startups that have died because they were not well prepared for a situation of losing revenue.

Can you name three most breakthrough startups in history?

The most impressive for me is a startup from Israel that is working on an autonomous driver. The company is named Mobileye. Intel has bought them for $18 billion approximately. They were one who developed the technology of driverless cars. This was a breakthrough.

Another one is also from Israel and this is an agritech company that creates food. They created a technology for making milk without a cow. It has the same taste and smell, but it doesn’t come from a cow. This is revolutionary and it is fighting with poverty. Now we can create ways to spread out this new technology of feeding people without depending on the resources that are limited and not renewable.

The third one is not easy because these are so many buzzy names now. We could talk about Uber and the way they changed everything but I would like to be different. I am an investor of Amazon and I like to mention them. You might think that the reason is they are the second most valuable company in the world after Apple. But I would like to mention them because when startups were nothing and nobody would mention this name in 2000-2001, they were creating a new business model, that 20 years after would demonstrate that they were right since the beginning. They were very proactive and resilient to support all of the critics, attacks, and everything that has come against them. I am a fan of Amazon and I like them a lot.

What books/films would you recommend to a startup founder?

I still like to read books but not business ones. I don’t read professional books anymore, perhaps about Steve Jobs or Elon Musk. There are some books that I still need to read because of my job. For example, The History of Pension Funds, M&A’s, etc. Other than that I read a lot of information and I’m a high volume consumer of information throughout the world.

There are a lot of different sources of information worldwide in different areas. You should define what are your business objectives, what are you looking for, what are your interests, and based on that you restrict what you should read. Otherwise, you will end up spending the whole day reading a lot of different sources. You will waste your time and will not grab anything relevant. I have some books that I like, but these are my choices: The Black Swan, Venture Capital, The Startup Nation, Zero to One. They are really nice, but I am probably repeating what other ones have already suggested.

What is your favorite city?

My family comes from Europe. My grandfather from my Mom’s side came from Ukraine. My last name Astrachan is the same as a city in Russia on the border of the Caspian Sea close to the Volga Delta. I’m from Astrakhan in Russia by my father’s side. Before the pandemic, I used to travel a lot. I like to ski and to visit historic places. I could live everywhere. I like Spain very much. We have been there with my daughter who has stayed there for a year. I like Italy. I could live in England. If I have to choose the only place now I would choose Spain.

Last year I have visited Greece and I love it. I’m planning to visit Eastern Europe: Romania, Poland, Ukraine, and all of the countries that are connected with my family origins. It is so difficult to choose only one place to go to.

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About the Author

Roman Bdaitsiiev

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